Insurance Trusts

Keep value outside of your estate

Insurance trusts are used in estate planning as a means to pass substantial value to beneficiaries outside of the taxable estate.

The first key to insurance trusts is that insurance proceeds are not taxed as income upon receipt by the beneficiary. Whether the beneficiary is an individual, a corporation, or even the estate. However, if the proceeds are received directly by the estate, they are included in the value of the estate that could be subject to <. So, for example, a $1 million policy could make the difference between an estate being over or under its exemption amount.

So, the first suggestion is to have your insurance policies payable to named beneficiaries. It is quite easy to change named beneficiaries over time, and to divide proceeds up amongst many beneficiaries.

Insurance also reduces the potential taxable value of an estate to the extent that premiums themselves are no longer in the estate - the premium money has gone to the insurance company.

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In Gift Tax, we saw how gifts of less than $!1,000 do not have to be reported or added back to reduce the exemption amount in the estate.

An insurance trust is simply one that receives a gift from the settlor each year. this gift is less than the $11,000 limit so it does not have to reduce the exemption amount. One of more of the insurance trust's beneficiaries are notified of the gift by the Trustee and waive their right to receive the gift. The Trustee uses the gifted amount to pay the premium on a life insurance policy that the insurance trust owns on the life of the second-to-die of the settlor and spouse.

The earlier this is started, the more insurance that can be obtained, and the longer the premiums are paid for.

Here's an example. A couple whose estate would have had a taxable amount except in the few years approaching 2009 when the exemption amount is $3.5 million and 2010 when there is no estate tax, set up an insurance trust which obtains a $2 million policy payable when the second of them dies. the annual premium is $10,000. If they live, say 30 years, into their late 80s, the insurance trust has received 30 x$10,000 or $300,000 that is not included in their estate taxable value. their beneficiaries receive $2,000,000 with no tax payable.

The sharp financial reader will know that this is not a pure increase in wealth available to the beneficiaries of $1.7 million. The time value of money has to be applied to put the $10,000 annual gifts / premium payments that are paid out over 30 years starting right away on the same basis as the proceeds of $2 million received 30 years from now. And it must take into account not only the $300,0000 that is not taxed 30 years from now but also the fact that the amount not taxed is what the $300,000 of gift / premium would have grown to had it been left in the estate.

Another important feature that makes insurance trusts a viable estate planning tool is that they must be irrevocable: that is, they cannot be revoked by the settlor[s] once they are set up. The key point is that if it was revocable, then it would be under the control of the settlor[s] and would therefore have to be included as assets of their estate. The Trustee can change, but not the insurance trust or its beneficiaries. So this tool is not useful for those who are undecided about their intended beneficiaries.


Our intent is to describe estate planning scenarios and solutions. We do not provide advice - for advice you should consult professionals such as attorneys and accountants.

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